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2009-2010 Homebuyer Tax Credit Extension
Updated:
11/25/09
The Worker, Homeownership, and
Business Assistance Act of 2009 has extended the tax credit of up to
$8,000 for qualified first-time home buyers purchasing a principal
residence as well as a tax credit of up to $6,500 for qualified repeat
home buyers. Click the links below for info on the new program:
>>>>> ARCHIVED INFORMATION PERTAINING TO THE 2008-2009 HOMEBUYER TAX CREDITS <<<<<
Enhanced 2009 Tax Credit Provides
Outstanding Opportunity for First-time Home Buyers - Frequently Asked
Questions
Everything You Wanted to Know about the $8,000
First-time homebuyer Tax Credits
1.
What’s this new homebuyer tax incentive for 2009?
The 2008 $7,500 repayable credit is increased to $8000 and the
repayment feature is eliminated for 2009 purchasers. Any home that
is purchased for $80,000 or more qualifies for the full $8000
amount. If the house costs less than $80,000, the credit will be 10%
of the cost. Thus, if an individual purchased a home for $75,000,
the credit would be $7500. It is available for the purchase of a
principal residence on or after January 1, 2009 and before December
1, 2009.
2. Who is eligible?
Only first-time homebuyers are eligible. A person is considered a
first-time buyer if he/she has not had any ownership interest in a
home in the three years previous to the day of the 2009 purchase.
3. How does a tax credit work?
Every dollar of a tax credit reduces income taxes by a dollar.
Credits are claimed on an individual’s income tax return. Thus, a
qualified purchaser would figure out all the income items and
exemptions and make all the calculations required to figure out
his/her total tax due. Then, once the total tax owed has been
computed, tax credits are applied to reduce the total tax bill. So,
if before taking any credits on a tax return a person has total tax
liability of $9500, an $8000 credit would wipe out all but $1500 of
the tax due. ($9,500 - $8000 = $1500)
4. So what happens if the purchaser is eligible for an $8000 credit
but their entire income tax liability for the year is only $6000?
This tax credit is what’s called “refundable” credit. Thus, if the
eligible purchaser’s total tax liability was $6000, the IRS would
send the purchaser a check for $2000. The refundable amount is the
difference between the $8000 credit amount and the amount of tax
liability. ($8000 - $6000 = $2000) Most taxpayers determine their
tax liability by referring to tables that the IRS prepares each
year.
5. How does withholding affect my tax credit and my refund?
A few examples are provided at the end of this document. There are
several steps in this calculation, but most income tax software
programs are equipped to make that determination.
6. Are there any income restrictions?
Yes. The income restriction is based on the tax filing status the
purchaser claims when filing his/her income tax return. Individuals
filing Form 1040 as Single (or Head of Household) are eligible for
the credit if their income is no more than $75,000. Married couples
who file a Joint return may have income of no more than $150,000.
7. How is my “income” determined?
For most individuals, income is defined and calculated in the same
manner as their Adjusted Gross Income (AGI) on their 1040 income tax
return. AGI includes items like wages, salaries, interest and
dividends, pension and retirement earnings, rental income and a host
of other elements. AGI is the final number that appears on the
bottom line of the front page of an IRS Form 1040.
8. What if I worked abroad for part of the year?
Some individuals have earned income and/or receive housing
allowances while working outside the US. Their income will be
adjusted to reflect those items to measure Modified Adjusted Gross
Income (MAGI). Their eligibility for the credit will be based on
their MAGI.
9. Do individuals with incomes higher than the $75,000 or $150,000
limits lose all the benefit of the credit?
Not always. The credit phases-out between $75,000 - $95,000 for
singles and $150,000 - $170,000 for married filing joint. The closer
a buyer comes to the maximum phase-out amount, the smaller the
credit will be. The law provides a formula to gradually withdraw the
credit. Thus, the credit will disappear after an individual’s income
reaches $95,000 (single return) or $170,000 (joint return). For
example, if a married couple had income of $165,000, their credit
would be reduced by 75% as shown: Couple’s income $165,000 Income
limit 150,000 Excess income $15,000 The excess income amount
($15,000 in this example) is used to form a fraction. The numerator
of the fraction is the excess income amount ($15,000). The
denominator is $20,000 (specified by the statute).
In this example, the disallowed portion of the credit is 75% of
$8000, or $6000 ($15,000/$20,000 = 75% x $8000 = $6000) Stated
another way, only 25% of the credit amount would be allowed. In this
example, the allowable credit would be $2000 (25% x $8000 = $2000)
10. What’s the definition of “principal residence?”
Generally, a principal residence is the home where an individual
spends most of his/her time (generally defined as more than 50%). It
is also defined as “owner-occupied” housing. The term includes
single-family detached housing, condos or co-ops, townhouses or any
similar type of new or existing dwelling. Even some houseboats or
manufactured homes count as principal residences.
11. Are there restrictions on the location of the property?
Yes. The home must be located in the United States. Property located
outside the US is not eligible for the credit.
12. Are there restrictions related to the financing for the mortgage
on the property?
In 2009, most financing arrangements are acceptable and will not
affect eligibility for the credit. Congress eliminated the financing
restriction that applied in 2008. (In 2008, purchasers were
ineligible for the $7500 credit if the financing was obtained by
means of mortgage revenue bonds.) Now, mortgage-revenue bond
financing will not disqualify an otherwise-eligible purchaser.
(Mortgage revenue bonds are tax-exempt bonds issued by a state
housing agency. Proceeds from the bonds must be used for below
market loans to qualified buyers.)
13. Do I have to repay the 2009 tax credit?
NO. There is no repayment for 2009 tax credits.
14. Do 2008 purchasers still have to repay their tax credit?
YES. The $7500 credit in 2008 was more like an interest-free loan.
All eligible purchasers who claimed the 2008 credit will still be
required to repay it over 15 years, starting with their 2010 tax
return.
Some Practical Questions
15. How do I apply for the credit?
There is no pre-purchase authorization, application or similar
approval process. All eligible purchasers simply claim the credit on
their IRS Form 1040 tax return. The credit will be reflected on a
new Form 5405 that will be attached to the 1040. Form 5405 can be
found at www.irs.gov.
16. So I can’t use the credit amount as part of my down payment?
No. Congress tried hard to devise a mechanism that would make the
funds available for closing costs, but found that pre-funding would
require cumbersome processes that would, in effect, bring the IRS
into the purchase and settlement phase of the transaction.
17. So there’s no way to get any cash flow benefits before I file
my tax return?
Yes, there is. Any first-time homebuyers who believe they are
eligible for all or part of the credit can modify their income tax
withholding (through their employers) or adjust their quarterly
estimated tax payments. Individuals subject to income tax
withholding would get an IRS Form W-4 from their employer, follow
the instructions on the schedules provided and give the completed
Form W-4 back to the employer. In many cases their withholding would
decrease and their take-home pay would increase. Those who make
estimated tax payments would make similar adjustments.
Some “Real World” Examples
18. What if I purchase later this year but can’t get to settlement
before December 1?
The credit is available for purchases before December 1, 2009. A
home is considered as “purchased” when all events have occurred that
transfer the title from the seller to the new purchaser. Thus,
closings must occur before December 1, 2009 for purchases to be
eligible for the credit.
19. I haven’t even filed my 2008 tax return yet. If I buy in 2009,
do I have to wait until next year to get the benefit of the credit?
You’ll have a helpful choice that might speed up the process.
Eligible homebuyers who make their purchase between January 1, 2009
and December 1, 2009 can treat the purchase as if it had occurred on
December 31, 2008. Thus, they can claim the credit on their 2008 tax
return that is due on April 15, 2009. They actually have three
filing options. If they purchase between January 1, 2009 and April
15, 2009, they can claim the $8000 credit on the 2008 return due on
April 15. They can extend their 2008 income-tax filing until as late
as October 15, 2009. (The IRS grants automatic extensions, but the
taxpayer must file for the extension. See
www.irs.gov for
instructions on how to obtain an extension.) If they have filed
their 2008 return before they purchase the home, they may file an
amended 2008 tax return on Form 1040X. (Form 1040X is available at
www.irs.gov)
Of course, 2009 purchasers will always have the option of claiming
the credit for the 2009 purchase on their 2009 return. Their 2009
tax return is due on April 15, 2010.
20. I purchased my home in early 2009 before the stimulus bill was
enacted. I claimed a $7500 tax credit on my 2008 return as prior law
had permitted. Am I restricted to just a $7500 credit?
No, you would qualify for the $8000 credit. Eligible purchasers who
have already claimed the $7500 credit on a 2008 return for a 2009
purchase may file an amended return (IRS Form 1040X) for the 2008
tax year. This amended return will enable them to obtain the
additional $500 credit amount.
21. If I claim my 2009 $8000 credit on my 2008 tax return, will I
have to repay the credit just as the 2008 credits are repaid?
No. Congress anticipated this confusion and has made specific
provision so that there would be no repayment of 2009 credits that
are claimed on 2008 returns.
22. I made an eligible purchase of a principal residence in May 2008
and claimed the $7500 credit on my 2008 tax return. My brother, who
has never owned a home, wishes to purchase a partial interest in the
home this spring and move in. Will he qualify for the $8000 credit,
as well?
No. Any purchase of a principal residence (or interest in a
principal residence) from a related party such as a sibling, parent,
grandparent, aunt or uncle is ineligible for the tax credit. Since
you and your brother are related in this way, he cannot qualify for
the credit on any portion of the home that he purchases from you,
even if he is a first-time homebuyer.
23. I live in the District of Columbia. If I qualify as a
first-time homebuyer, can I use both the $5000 DC credit and the
$8000 credit?
No; double dipping is not allowed. You would be eligible for only
the $8000 credit. This will be an advantage because of the higher
credit amount, plus the eligibility requirements for the $8000
credit are somewhat more easily satisfied than the DC credit.
24. I know there is no repayment requirement for the $8000
credit. Will I ever have to repay any of the credit back to the
government?
One situation does require a recapture payment back to the
government. If you claim the credit but then sell the property
within 3 years of the date of purchase, you are required to pay back
the full amount of any credit, including any refund you received
from it. A few exceptions apply. (See below, #24). Note that this
same 3-year recapture rule applies, as well, to the $7500 credit
available for 2008. This provision is designed as an
anti-flipping rule.
25. What if I die or get divorced or my property is ruined in a
natural disaster within the 3 years?
The repayment rules are eased for many circumstances. If the
homeowner who used the credit dies within the first three years of
ownership, there is no recapture. Special rules make adjustments for
people who sell homes as part of a divorce settlement, as well.
Similarly, adjustments are made in the case of a home that is part
of an involuntary conversion (property is destroyed in a natural
disaster or subject to condemnation by eminent domain by an
authorized agency) within the first three years.
26. I have a home under construction. Am I eligible for the credit?
Yes, so long as you actually occupy the home before December 1,
2009.
WITHHOLDING EXAMPLES:
Note: The impact of estimated tax payments would be the
same.
Situation 1: Sally plans her withholding so that her
withholding is as close as possible to what she anticipates as her
income tax liability for the year. When she fills out her 1040, her
liability is $6000. She has had $6000 withheld from her paycheck.
She also qualifies for the $8000 homebuyer credit.
Result: Sally’s withholding satisfies her tax liability and
reduces it to zero. She will receive a refund of the full $8000.
Situation 2: Nick and Nora file a joint return. Nick is
self-employed and makes estimated payments; Nora has taxes withheld
from her salary. When they compute their taxes, their combined
withholding and estimated tax payments are $11,000. Their income tax
liability is $9800. They also qualified as first-time homebuyers and
are eligible for the $8000 refundable tax credit.
Result: Ordinarily, their combined estimated tax payments and
withholding would make them eligible for a refund of $1200 ($11,000
- $9800 = $1200). Because they are eligible for the refundable tax
credit as well, they will receive a refund of $9200 ($1200 income
tax refund + $8000 refundable tax credit = $9200)
Situation 3: Cesar and LuzMaria both have income taxes withheld
from their salaries and file a joint return. When they file their
income tax return, their combined withholding is $5000. However,
their total tax liability is $7200, generating an additional income
tax liability of $2200 ($7200 - $5000). They also qualify for the
$8000 first-time homebuyer tax credit.
Result: Cesar and LuzMaria have been under-withheld by $2200.
Ordinarily, they would be required to pay the additional $2200 they
owe (plus any applicable interest and penalties). Because they are
eligible for the refundable homebuyer tax credit, the credit will
cover the $2200 additional liability. In addition, they will receive
an income tax refund of $5800 ($8000 - $2200 = $5800). If they owed
penalties and/or interest, that amount would reduce the refund.
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